When the local bank goes, what goes with it

There are about 4,500 banks in the United States, and more than 4,000 of them are community banks. Community banks hold roughly 15 percent of the industry’s loans. With that 15 percent they make 36 percent of the country’s small business loans and 70 percent of its agricultural loans.

Add the hundreds of certified community development financial institutions, the loan funds, community development corporations, and banks that lend where others will not, and you have the financial system most of Main Street actually uses. It is worth being precise about what that system does, to be able to follow the thread of what happens when a piece of it disappears.

What they carry

The pattern is consistent across every dataset: community institutions punch far above their weight wherever the borrower is small, local, or hard to read from a spreadsheet.

When the Paycheck Protection Program opened in 2020, 82 percent of community banks took part and they made 31 percent of all PPP loans, more than double their share of commercial lending. The businesses that got money first were, disproportionately, the ones whose banker already knew them.

That pattern shows up in ordinary years too. In the Federal Reserve’s 2026 Small Business Credit Survey, applicants at small banks were the most likely of any lender type to be fully approved, at 57 percent. Bank and credit union applicants reported higher satisfaction than online lender applicants, and 60 percent of the businesses that borrowed online said the cost turned out higher than they expected.

Community lenders take the next step out. A Richmond Fed brief from this year lays out the economics plainly: in low- and moderate-income areas, the information needed to judge a borrower is expensive to gather, so mainstream lenders perceive risk that is not really there and stay away. CDFIs exist to gather that information anyway. In the most recent fiscal year, CDFI Fund award recipients financed more than 109,000 businesses and 45,000 affordable homes, and 71 percent of CDFIs reported rising demand, most of it from new customers.

The thing all of these institutions sell is not a rate. It is the willingness to know a borrower well enough to say yes.

What leaves when one closes

A careful study of this question is Hoai-Luu Nguyen’s “Are Credit Markets Still Local?”, published in the American Economic Journal in 2019. It tracks what happened to small business lending in neighborhoods that lost a bank branch to post-merger consolidation, using the closures that were effectively random from the neighborhood’s point of view.

The answer: annual small business loan originations fell by about $453,000 against a baseline of $4.7 million, roughly a tenth, and stayed depressed for up to six years. The effect was concentrated within six miles of the closed branch and was worst during the financial crisis, exactly when credit mattered most. Other lenders did not fill the hole. The relationships that made the loans possible had lived in that branch, and they left with it.

Closures are not rare. Between 2019 and 2023 the country lost 5.6 percent of its bank branches. The number of banking deserts grew by 217. Low- and moderate-income areas lost branches faster than wealthier ones, and majority-Black areas gained deserts at 10.1 percent against a national rate of 6.4 percent. The Philadelphia Fed’s researchers note the obvious consequence: the people who most rely on walking into a bank are the ones most likely to find the door locked.

Mergers are the other exit. The Kansas City Fed counts more than 1,700 community bank mergers in the past decade, over 200 a year through the late 2010s. The Federal Reserve’s research on what follows is decades deep and consistent: when a large bank acquires a small one, small business lending in the acquired bank’s markets falls, other lenders offset some of it, and the offset is weakest in rural markets. A merger between two small banks tends to leave local credit intact. A small bank absorbed into a large one usually does not.

Something does move in to replace the lost lending, and the survey data says what. The share of small business loan applicants going to online lenders rose from 17 percent to 29 percent in five years. Those are the borrowers who then report the lowest satisfaction and the largest gap between the cost they expected and the cost they got.

The slow version

Outright closure is the visible failure. The quieter one is a bank that stays open and stops being the small business’s bank.

Over two decades, small business loans at community banks fell from 24 percent to 12 percent of their total loans. The institutions did not go anywhere. Their customers did, one product at a time: a card here, a payments tool there, an online line of credit when the local process took too long. Three quarters of small businesses now go outside their primary institution for at least one financial need. Every one of those moves takes a slice of the operating relationship, and the deposits and the data go with it.

The Richmond Fed’s CDFI survey names the constraint from the inside: 71 percent of CDFIs cite staffing and 69 percent cite technology as what stops them meeting demand. The demand is there. The relationships are there. The product is where it breaks.

What we take from it

Read together, the research makes a piercing point. Local credit depends on local institutions, the damage when one goes is measurable and lasting, and nothing that arrives afterwards does the job as well. Keeping these institutions in the business of small business is not sentiment. It is the cheapest way this country has of getting capital to a borrower a spreadsheet cannot see.

The part that is fixable is the product. A community bank or community lender that can offer a small business the loan, the card, and the view of its finances it now expects, under its own brand and with its own judgment about the borrower, does not lose that customer to speed. That is the whole of what Stitch builds. Business lending is live, the card is next, and each rung is built to sit behind the institution the community already trusts.

If you run one of those institutions, we would like to hear from you.

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Sources: Better Markets, Community Banks: Vital to Main Street Families, Small Businesses, and the Financial System, April 2025 (bank counts, loan shares, drawn from FDIC data); FDIC Community Banking Study, 2020 (PPP participation and share); Federal Reserve, 2026 Report on Employer Firms, Small Business Credit Survey (approval, satisfaction, online lender costs and share); Federal Reserve Bank of Richmond, Community Development Financial Institutions as a Means to Overcome Market Failures, May 2026, and 2025 Federal Reserve CDFI Survey Key Findings; CDFI Coalition fact sheet, March 2025 (certified CDFIs, FY2024 financing); Nguyen, Are Credit Markets Still Local? Evidence from Bank Branch Closings, American Economic Journal: Applied Economics, 2019; Federal Reserve Bank of Philadelphia, U.S. Bank Branch Closures and Banking Deserts, February 2024; Federal Reserve Bank of Kansas City, community banking bulletins, October and December 2024; Berger, Saunders, Scalise, and Udell, The Effects of Bank Mergers and Acquisitions on Small Business Lending, Federal Reserve Board; Datos Insights Matrix, 2025.